Do people buy more or less of an item when their incomes increase? As it turns out, that's a more complicated question than it might initially seem. For example, if a person were to win the lottery, he would likely take more rides on private jets than he did before. On the other hand, the lottery winner would probably take fewer rides on the subway than before.
Economists categorize items as normal goods or inferior goods on exactly this basis. If a good is a normal good, then the quantity demanded goes up when income increases, and the quantity demanded goes down when income decreases. If a good is an inferior good, then the quantity demanded goes down when income increases and goes up when income decreases.
In our example, private jet rides are a normal good and subway rides are an inferior good. There are two things to note about normal and inferior goods:
- What is a normal good for one person may be an inferior good for another person, and vice versa. For an overall market, a good is normal if market demand increases when income increases, on average, for the people in that market, and a good is inferior if market demand decreases when average income increases.
- It's possible for a good to be neither normal nor inferior- for example, it's quite possible that the demand for toilet paper neither increases nor decreases when income changes!